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© 2016 LNS Research. All Rights Reserved
June 2016
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Manufacturing today is undergoing a
radical change, which LNS
Research has categorized as the
Digital Transformation of
manufacturing. It is reflected in the
concepts embodied in the U.S. NIST
Smart Manufacturing Leadership
Coalition initiative, Germany’s
Industrie 4.0, and comparable efforts
around the globe in virtually every manufacturing economy. Digital Transformation
represents the opportunity for manufacturing companies to enact not only new
ways of providing value to their customers but whole new business models.
No industry is immune from the need to pursue Digital Transformation and no
industry is better suited to gain from it than the Aerospace and Defense (A&D)
sector. With both commercial and governmental customers demanding more
system lifetime support in procurement contracts, the A&D industry must invest in
new and better ways to meet these demands. The use of the best technologies
available can drive Operational Excellence in A&D, both in manufacturing and in
after-delivery services and support.
A&D companies that do not prepare for the digital future are going to struggle to
remain competitive as the A&D sector adopts a next-generation model for
supporting systems over the next 20 years.
In this Research Spotlight, LNS Research will provide A&D suppliers with
recommendations for getting their Digital Transformation journey on track,
including:
A framework for approaching Digital Transformation
How MRO is enabling new business models, including selling capacity
instead of capital
The importance of democratizing data across the supply chain to stimulate
data-led innovation
Investing in the right tools and technologies for success
Research Spotlight
Why the A&D Industry Must Embrace Digital Transformation Now
No industry is immune
from Digital
Transformation, and
no industry is better
suited to gain from it
than the Aerospace
and Defense sector.
The A&D industry
must invest in new
and better ways to
meet these demands.
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Why the A&D Industry Must Embrace Digital Transformation Now
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© 2016 LNS Research. All Rights Reserved
June 2016
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The LNS Research Digital Transformation Framework
Whether referring to the increasing application of digital technology in
manufacturing as Smart Manufacturing, Industrie 4.0, Next Generation
Manufacturing, or Manufacturing Digitization, the simple fact is that manufacturing
is undergoing an evolutionary step change. Like the three major industrial leaps of
the past, moving from single craftsman (Gen 1) to the assembly line and powered
systems (Gen 2) and the application of Programmable Logic Controllers (PLCs)
and Distributed Control Systems (DCSs) (Gen 3) this next generation of
manufacturing also employs new technology, and is being driven by information—
digitally. For companies looking to make this Digital Transformation, LNS Research
has developed a framework to help them understand how to evolve their systems.
The overall concept is that Digital Transformation is driven by the need to pursue
Operational Excellence. In virtually every research practice at LNS Research end-
user surveys show that within the top three strategic drivers for adopting any
business process improvement initiative (BPI), such as Asset Performance
Management (APM), Manufacturing Operations Management (MOM), or Enterprise
Quality Management Software (EQMS) is the desire to improve operational
performance. In the APM area it is the top driver across all industries and in A&D
specifically, with 51% of respondents identifying it as their number one driver, and
over 80% having it in the top three drivers across all industries. In A&D increasing
production capacity and manufacturing agility were the other top drivers.
Once an A&D
enterprise
recognizes the need
to pursue
Operational
Excellence with a
Digital
Transformation
strategy, they must
craft a systems
architecture that
extends across the
entire business.
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Research Spotlight
Why the A&D Industry Must Embrace Digital Transformation Now
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June 2016
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What is the number one strategic objective for improving asset performance in your
organization?
Once an A&D enterprise recognizes the need to pursue Operational Excellence
and that a Digital Transformation is the best path toward success they must craft a
systems architecture that extends across the entire business, from the engineering
and design functions, across the business systems, and reaching all the way to the
shop floor.
In A&D the need for architecture also extends to the after-delivery service function
as well since so many aircraft and defense systems have program lives measured
in decades instead of months or years like in the consumer sector. Building the
business case for and selecting the technology to support these initiatives as they
fill in the architecture completes the framework.
The challenge for the A&D industry going forward is that while the industry has an
idea of how it intends to leverage Smart Connected Assets, as the charts on the
following pages will display, there is a lack of understanding about how one of the
key enabling technologies—the Industrial Internet of Things (IIoT)—impacts their
businesses today.
1%
1%
3%
3%
4%
5%
5%
6%
6%
11%
51%
0% 10% 20% 30% 40% 50% 60%
Reducing energy usage
Improving regulatory compliance and reporting
Increasing manufacturing agility
Enhancing overall sustainability performance
Improving product quality
Improving safety
Another objective not listed
Raising financial performance
Managing operational risk
Increasing production capacity and capability
Better operational performance
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June 2016
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What are the top IIoT use cases your company is pursuing today? (A&D)
What are the top IIoT use cases your company will start pursuing in the next year?
(A&D)
5%
10%
15%
15%
15%
15%
20%
20%
20%
30%
30%
35%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Supplier visibility
Traceability and serialization
Asset and material tracking
Asset reliability
Customer access to information
Improving safety
Business model transformation
Production visibility
Quality improvement
Energy efficiency
Internet enabled products
Remote monitoring
5%
10%
10%
10%
15%
15%
20%
20%
20%
30%
30%
30%
0% 5% 10% 15% 20% 25% 30% 35%
Production visibility
Traceability and serialization
Remote monitoring
Improving environmental performance
Energy efficiency
Asset reliability
Supplier visibility
Internet enabled products
Asset and material tracking
Quality monitoring
Customer access to information
Business model transformation
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Why the A&D Industry Must Embrace Digital Transformation Now
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© 2016 LNS Research. All Rights Reserved
June 2016
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Please indicate how the IoT is impacting your business today? (A&D)
This presents the A&D industry with both an opportunity and a challenge in the
face of the business evolution that is occurring within the industry today.
The A&D Industry Business Drivers in the Digital Age
The A&D industry is unlike many other industries in that it designs, builds, and
supports comparatively high volumes of complex and expensive configure-to-order
(CTO) products. The underlying complexity of these products, coupled with the
CTO nature of the systems, has led to manufacturing systems that have not been
nearly as efficient as those in other industries such as automotive or consumer
electronics and durable goods.
In both the commercial and defense elements of A&D this has driven costs upward
and both commercial and government customers are demanding more cost
effectiveness. As the chart on the following page will show, this has driven the A&D
industry to make the improvement of manufacturing efficiency a top operational
objective.
1%
3%
5%
9%
10%
19%
19%
35%
0% 5% 10% 15% 20% 25% 30% 35% 40%
We understand/are aware and our customerdemands are driving us
We are still investigating the impact
Our customer demands are causing us to start toinvest in Iot technologies
We are rapidly pursuing IoT opportunities either foroperations, customers, or both
We see value to our operations and have started toinvest in IoT technologies
We understand/are aware but see no value at thistime
We have interest but are still investigating theimpact
Don't understand/know about IoT
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© 2016 LNS Research. All Rights Reserved
June 2016
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What is the top operational objective for your company? (A&D)
This is set against a background where the supply chain is growing more complex,
budgets are constrained, materials and construction innovation is driving new
products and capabilities, and customers are demanding smarter products and
service support after delivery on a scale not seen before.
What are the most important trends impacting A&D companies today?
2%
6%
8%
14%
15%
17%
39%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Achieve corporate social responsibility goals
Improve supply chain responsiveness
Better manage operational risk
Improve customer service
Improve ability to deliver new products
Ensure operations are in compliance
Improve manufacturing efficiency
0%
13%
14%
16%
17%
29%
34%
45%
68%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Compliance with industry specific regulatory requirementslike iTAR
Innovation in 3D printing
New service-oriented business models
Smart and connected products
Innovation in composite materials
Managing increasing market demand and shorter builttimes
Integration of business, engineering, and operationssystems
Managing shrinking defense budgets
Collaboration with increasingly complex supplier networks
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© 2016 LNS Research. All Rights Reserved
June 2016
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In addition to the opposing and interconnected drivers and challenges in the A&D
industry, like growing supplier networks, shrinking defense budgets, and the
production of high-volume, CTO products, today customers in both the commercial
and defense sectors have rising demands.
A&D buyers are making decisions on the total cost to acquire and maintain
aircraft and defense systems, which regularly have lifecycles of decades
rather than months or years like other industries
The visibility, analytics, and integrative capabilities offered by the Digital
Transformation Framework are becoming critical in fulfilling these demands
A&D suppliers need to update outdated systems and processes with cutting
edge technology—Digitally Transforming their operations
A&D Data Model Opportunities During the Design and
Manufacturing Phases
CTO equipment is expensive, complex, long-lived, and often mission-critical. As
such, A&D is the birthplace of many Design for Sustainment (DfS) concepts such
as Design for Reliability, availability, maintainability, system safety, cost, testability
(diagnostics planning), logistics, and more. These DfS concepts are intended to
provide predictability of adverse events at the component, sub-system, system,
and system of system levels during systems engineering and product
development. These predictions are intended to reduce reliance on testing-in
performance by driving sustainment-enhancing product and operational changes
earlier in the development process.
Unfortunately, many of the practices in use today, particularly in the defense
community, have roots stretching back to the 1960s and 70s. Although enhanced
and refined over the years, the approaches poorly predict true system
performance. They can generate inaccurate and even misleading decisions
regarding component selection, system architecture, and sustainment planning.
New and accurate DfS modelers have been deployed, such as new simulation
techniques that support Prognostic Health Monitoring (PHM) and Condition-Based
Monitoring (CBM) initiatives. However, much of the component and Line
Replaceable Unit (LRU) reliability data being fed into these advanced simulators is
generated by dated and inaccurate approaches. This was underscored by an
internal Naval Surface Warfare Center study performed that identified that by far
the most common form of reliability prediction used by its contractors leveraged
obsolete and decommissioned military handbooks.
The DfS data is also underutilized in production planning and production execution,
departing from best practices developed in the automotive industries. Little
Design for
Sustainment (DfS)
concepts are
intended to provide
predictability of
adverse events at
the component, sub-
system, system, and
system of system
levels during
systems engineering
and product
development.
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Research Spotlight
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© 2016 LNS Research. All Rights Reserved
June 2016
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knowledge of the systems level risks is communicated to manufacturing. A&D
organizations disproportionately identify disparate systems and data sources and
poor continuous improvement as top challenges for achieving key asset
performance objectives.
Top challenges in A&D
Digital Transformation provides industry with opportunities to transform DfS,
production planning, and continuous improvement. It is well documented that
decisions made during concept, systems engineering, and detailed design have
the highest impact on product performance with the lowest cost. Industry must
seize the opportunity to transform, starting in the development process, and
leverage Big Data analytics and the IoT to generate new performance insights
early in development, and new levels of accuracy in DfS decision making.
The MRO Challenge in A&D: Service After Delivery
Another key aspect of DfS is that it allows suppliers to actually meet the growing
customer demand for full system-life support. As noted above, both commercial
aviation buyers as well as government agencies are making purchasing decisions
on the total cost to acquire and support the aircraft or defense system over the
entire expected life of the program. In many cases this means that the supplier
must assume the cost of after-delivery service or at least provide the support at a
negotiated rate, with the supplier assuming the risk of above-expected support. To
16%
28%
27%
24%
25%
21%
29%
33%
0% 5% 10% 15% 20% 25% 30% 35%
Poor continuous improvement in terms ofculture
ROI justifications for improvement objectives
Lack of visibility into performance metrics
Disparate systems and data sources
A&D All
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June 2016
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reduce the risk suppliers must adopt DfS but this alone will not be sufficient to
ensure that they can profitably meet their support obligations.
With responsibility extending far beyond the end of the assembly line or even the
delivery line, A&D manufacturers will need to maintain the Bill-of-Material (BOM)
beyond the as-delivered BOM that is common today, to the as-maintained BOM,
including all field retrofits and modifications. With the lifecycles of some systems,
particularly defense airframes such as the B-52—now in its 61st year of service—
becoming ever longer (the B-52 is expected to serve into the 2040s—for an 85- to
90-year life), the data management and record keeping problem will grow
increasingly complex.
The ability to know exactly which parts, assemblies, and major systems compose
the asset is essential to not only meeting cost requirements but the up-time and
time-to-repair service level agreements (SLAs) that will undoubtedly be part of the
support contract.
Just having this information will not be sufficient. Part of the solution must be to
display the current as-maintained BOM details on a multitude of mobile devices,
including augmented reality devices that will provide service technicians the ability
to visually see the 3D transparent image so they can understand not only what
parts and systems lie behind the access panel or aircraft skin but how to access
them quickly with the least effect on adjacent parts or assemblies.
Finally, when suppliers assume support responsibilities for their products post-
delivery, they will need predictive analytic tools that not only leverage the real-time
IoT data from the product for diagnostic and CBM activities but with the capability
to predict the best maintenance activities to be performed at every service interval
to minimize cost, maximize uptime and, most importantly, ensure that the
supported system is operating within the specified performance envelope at all
times. This means mods must be coordinated with regular maintenance activities
and the systems used for scheduling and recording all MRO activities feedback
into the data management platform so the as-maintained BOM is accurate at all
times.
Changing the Game: Using MRO to Sell Capacity Instead
of Capital in Commercial and Redefining System
Sustainability in Defense
While support after delivery is an extension of the current model in which suppliers
deliver products, there are also new business models being enabled by Digital
Transformation. In the consumer sector the impact of Uber on the taxi business or
Airbnb on the hotel industry are well known Digital Transformation examples. In the
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© 2016 LNS Research. All Rights Reserved
June 2016
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B2B or commercial world examples are less dramatic and do not capture the
headlines in the same way Uber has. One of the challenges for manufacturers is
that Uber is a service that effectively just transformed another service business—
taxis. This hade made it generally difficult for manufacturers in general to see the
potential in Digital Transformation. However, some examples are starting to
emerge such as Joy Global in mining or Rolls-Royce engines selling thrust to
airlines.
In commercial aviation the idea of selling capacity instead of capital has already
taken root in the engine business, but it is not inconceivable that an airline might
buy passenger-seat-miles or pound-miles from an airplane manufacturer instead of
an airplane in the future. The benefit to the airline is the transfer of much of the
operational risk associated with aircraft operation to the supplier instead of
themselves. For an A&D supplier to deliver this requires having accurate and
reliable information about the aircraft beyond what is needed just to guarantee
service or availability via serve or support contracts.
Big Data and associated predictive analytics capability will be needed to model all
aspects of aircraft operation such as fuel consumption and fuel prices.
Complicating the model is that the A&D prime supplier may enter into similar
arrangements with sub suppliers. For example, Boeing might have to subcontract
the engine performance to GE or Rolls-Royce. The management of these complex
relationships will require extensive data management capabilities across the entire
value chain. Selecting the right tools and technology to do this will be critical.
In both the
commercial and
defense sectors of
A&D, the future
looks to be a mix of
enhanced support
services, diagnostics
as a service, and
capacity versus
capital offerings.
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Why the A&D Industry Must Embrace Digital Transformation Now
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June 2016
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This capacity versus capital approach may not seem viable for the defense sector
where the potential for loss from hostile activity (or even in training accidents) is
ever-present but LNS Research believes the capacity versus capital model will
appeal to government as well in better managing expenses and further extending
concepts begun with Performance Based Logistics contracts. There are always
ways to construct contracts that indemnify the provider from loss by the operator
due to their direct actions. In the case of defense systems, LNS Research feels the
trend will be to look at the capacity instead of capital model first in non-combat
systems and support systems not exposed to hostile environments. As this
becomes viable in the support roles there will be a transition to systems exposed to
hazards as the legalities of combat risk are resolved.
So in both the commercial and defense sectors of A&D the future looks to be a mix
of enhanced support services, diagnostics as a service, and capacity versus
capital offerings, all of which will require a far greater set of data management and
predictive analytics capabilities than A&D companies possess today.
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June 2016
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Which statement best describes your attitudes toward APM service provided by the
vendors of smart connected devices in your facility?
Steps A&D Needs to Take to Embark on the Digital
Transformation Journey
The Aerospace and Defense industry has been a pioneer in concepts of Reliability,
Availability, Maintainability, and Safety. However, while certain A&D systems have
successfully made the jump to a digital operational model, the industry has been
slow to embrace Digital Transformation as a concept. Conversely, non-A&D
industries are more rapidly embracing Digital Transformation due to competitive
pressures, growing availability of commercial big data tools, and democratization of
newly available rich data such as consumer sentiment and social data.
The A&D industry’s product, process, and supply chain complexity creates
opportunities for Digital Transformation in three dimensions:
Laterally across systems
Vertically throughout the supply chain
Across the product lifecycle
This three dimensional view of Digital Transformation will enable broader adoption
of product servitization, increased competitiveness, and the potential for industry
disruption. While manufacturers can and should independently pursue Digital
3%
7%
10%
11%
22%
47%
5%
10%
15%
25%
15%
30%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Already purchasing machine capacity on smartconnected devices instead of buying machinery
Some other option not described
Have systems that generate data but only allowsuppliers access to help with diagnostics
Have systems that generate APM-related dataand allow suppliers to access that data
proactively
Have systems that generate APM-related databut don't allow suppliers to access
Don't have any smart technology enabledsystems that generate APM data
A&D All
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June 2016
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Transformation, the regulated nature of A&D requires that industry and
government also adapt to enable improvements in long-standing processes and
foster innovation.
Recommendations
Manufacturers
Manufacturers must leverage a framework such as LNS’s Digital
Transformation framework to successfully identify and deploy Digital
Transformation projects, with a focus on product servitization.
Manufacturers must invest in smart factories in order to build smart
products, such as smart aircraft. A part of this initiative will be to improve
the transfer of DfS and development data such as structures and
configurations to manufacturing.
Manufacturers should consider the move from expensive-to-maintain and
evolve homegrown Big Data systems to an increasingly capable set of
flexible commercial offerings.
Industry
The aviation Industry must adopt data transfer protocols that can distribute
Big Data’s volume, variety, and velocity between operators and the supply
chain.
Data must be democratized to encourage participation of the supply chain
and stimulate data-led innovation.
Current DfS data is inaccurate. Democratization of data must extend to
MRO and DfS data in order to address fundamental inaccuracies in DfS
inputs that lead to poor design and MRO decisions.
Government
Government bodies must encourage Digital Transformation by
standardizing DfS and Big Data requirements to avoid government-
imposed data and process silos. While defense departments have been
mandating COTS (Commercial Off The Shelf) and deploying PBL contracts
as efforts to increase cost-effectiveness of defense programs, these
programs have operated in many ways as silos, which increases costs and
slows innovation.
Industry disruption has been a hallmark of Digital Transformation. A&D is an
industry with highly complex, well-maintained, and mission critical equipment.
Depending upon the point of view, this makes A&D manufacturers either
particularly well positioned to derive value from Digital Transformation or
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© 2016 LNS Research. All Rights Reserved
June 2016
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particularly at risk for disruption from earlier adopters from within its ranks. Those
manufacturers that want to remain competitive must prioritize Digital
Transformation and consider the impact it will have on their future business
interests.
LNS Research provides advisory and benchmarking services to help Line-of-Business, IT, and Industrial Automation executives make critical business and operational decisions. LNS research focuses on providing insights into the key business processes, metrics, and technologies adopted in industrial operations.
Authors:
Dan Miklovic, Principal Analyst, [email protected]
Dan Jacob, Research Analyst, [email protected]
Distribution of this report made possible by:
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